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CORPORATIONS AND LIMITED LIABILITY ENTITIES
No longer are corporations the only form of business entity which will permit you to limit your personal liability in your business and real estate dealings. Through changes in Ohio law, limited liability partnerships and companies are becoming favorably-viewed as other mechanisms to limit claims by third parties against you and others in your business which might detrimentally affect your personal financial affairs. Speaking as to limited liabilities entities, aggregately, each of you should consider the following:
- As to Formation or Conversion to Limited Liability Entities: The formation of a limited liability entity or the conversion of your existing proprietorship or partnership to such a limited liability organization is oftentimes advisable. Each situation, of course, is different such that a limited liability entity may not always be to your best interest. However, for the most part, corporations and other limited liability entities are generally more advantageous and the tax consequences and differences in respect to proprietorships and partnerships versus limited liability entities are now essentially negligible, depending upon the particular form of organization you choose.
- As to your existing corporation, etc.: Maintaining the integrity of your corporation is critical. Statutes and case law support the contention that one must protect the integrity of one's corporation by maintaining minutes and other evidence of the separate existence of the corporation rather than, in essence, disregarding the corporate entity such that the "corporate veil" can be pierced by third parties. We strongly suggest that you regularly update your corporate records and that you conduct your business in such a fashion as to allow no third parties to claim their dealings with you are personal rather than protected by the corporate shield. Included in the appendix to this Package is a hand-out we provide our clients who form corporations advising them how to conduct themselves after corporate formation. The same references we make to newly-formed limited liability entities applies to your general business and we suggest you "read and heed."
- Close Corporations: Revisions in Ohio law now allow for your avoidance (to some extent) of the technicalities that are imposed upon general corporations. Your rights under a close corporation agreement include your right to permanently lock-in director and officer positions; set salaries and other forms of compensation; restrict the transfer of shares; and other rights which may allow for more control and authority than otherwise granted under the general statutes governing corporations. Many of our clients have amended their Articles of Incorporation to provide for Close Corporation status, particularly when others become involved in their corporate dealings.
- Buy-Sell Agreements: There is an old saying that "there is no such thing as a perfect partnership, just necessary ones." Same applies to ownership in limited liability entities. Changes in philosophies, goals and objectives; the death of an equity owner or divorce; unexpected disability; and, in general, an equity owner's desire to terminate existing relationships can result in "new" shareholders who might disrupt your existing business environment or might attempt to force the sale of your business, notwithstanding your desire to continue forward. Through the creation of appropriate buy-sell agreements and by combining other elements (such as those referenced above in respect to close corporations), alternatives are available so as to allow for continued business operations in the event another equity owner, voluntarily or involuntarily, terminates his/her relationship with your limited liability entity.
Another alternative such as to allow for the availability of funds in the event of death is obtaining corporate-funded life insurance. Our firm works with a number of extremely competent life insurance and investment counselors who can tailor an insurance policy capable of meeting your individual needs such as to allow surviving equity owners to purchase the interest of a deceased owner from his/her estate without serious financial impact.
Joseph B. Jerome and Associates
55 Public Square
Suite 2020
Cleveland, Ohio 44113-1901
